Start-ups and business model discovery: A talk by Mike Maples

In a talk about ‘thunder lizards’ and ‘pivots,’ Mike Maples discusses the topic of business model discovery. In his view a start-up exists for one reason only: to find a business model that turns its innovation into economic value.

Mike Maples pictures a business model as flows between the company and the customer (see example). Red flows go towards the customer and represents what costs the company money. Green flows come back to the company and represent what the company gets paid for. The more the green is larger than the red, the better the business model. While this is straight forward, most start-ups are not able to draw their business model.

Business models matter according to Mike Maples because there are maybe 20 to 30 flows and every flow is a strategic hypothesis that the company has to validate. If these hypotheses do not hold then the company has to ‘pivot’ and make a discontinuous change to the business model. Therefore, start-ups need to be dynamic and in a discovery mode.

The ultimate goal of business model discovery is to get product/market fit, meaning that the product can be offered to the market in a scalable and profitable way. Alter a start-up has discovered its business model it transitions to a real company. So a start-up is not a small version of the large company, it exists to discover the business model with the highest potential. Mike Maples discussed three forms of pivots and an example for each: pricing pivot (ngmoco), product pivot (Chegg), and an entire company pivot (Odeo/Twitter).

The start-up needs the tactical ability to iterate and the strategic ability to pivot. The dangerous is that start-ups get stuck in iteration after iteration and do not take aggressive, creative pivots. However, taking pivots should not be underestimated, it can be hard and painful, requiring to throw away what has cost a lot of effort and sacrifices. This means letting go of some things that are precious, like a product, a group of customers, a website, revenues, a strategy, etc.

These ideas have a strong relation with innovation theory. However, where innovation theory often discusses the inability of established companies to change radically, Mike Maples stresses that this problem is as relevant for a start-up who run the risk of iterating instead of pivoting. In addition, it shows that next to tools and techniques for product and process design and innovation, there is a strong need to support business model innovation, both for the content and for the process.

See also an earlier post on Business model shift.

Business model shift or drift?

It has been recognized that business models need to be adaptive and may change incrementally or radically, in particular in the early stages of a new venture, and need to be transformed when faced with disruptive innovations or changes in the environment.

However, how would one differentiate between the need to change the business model and the fact that often events take their own way and start drifting? And how to make a choice between sticking to the initial model or committing yourself to the new emerging model?

For example, in my work with a start-up company developing a potentially very innovative product, they need to do consulting to keep a cash flow. This consultancy is very successful but also time consuming, keeping then away from making major progress with their product. Should they maybe become a consultancy company?

In this area we can probably learn from strategic management, so a quick check of Wikipedia brings us to ‘strategic change’. Relevant concepts discussed there are ‘strategic drift’, a gradual change that occurs so subtly that it is not noticed until it is too late (Handy, 1989) and ‘strategic inflection point,’ a time in the life of a business when its fundamentals are about to change (Grove, 1999).

However, while this literature and the cases may give us some insight on how business model transformation for more established companies, it seems less suited for the more entrepreneurial start-up companies who operate much more in a greenfield scenario and have to deal with the fact that there is no proven, established business model to start with.

Here are some initial thought that may be considered in making a choice for a business model or business model change in a start-up scenario when it is it is hard to predict which business model is better in terms of profit or success and when you have to decide whether you should stick to your initial business model or commit yourself to a new business model.

First think about consistency (and synergy). Are the elements of the business model consistent with each other. Do they fit together and if possible reinforce each other so that they create synergies. This follows the age-old credo that the whole is more than the parts. [updated 15 October 2010]

Second think about scalability: Choose the one that has the biggest potential in terms of what can happen if it really takes off. In the previous example, it is the product model that can turn the start-up into a large company much faster than the consultancy model.

Third think about flexibility. Choose the business model that still keeps the most options open and is most easy to adapt until you know more about your customers, see also Osterwalder’s post on customer development.

Fourth think about innovativity. Choose the business model that differs most from existing business models, in particular if you need to differentiate yourself or what you want to achieve or offer is very different from the existing situation.

Fifth think about simplicity. Choose the business model that is the most straight forward. Complexity will follow automatically when you start going into the implementation details.

Sixth think about repeatability. Will it be possible to turn the business model into a formula that can be repeated. This makes it possible to grow outside of the current product/market combination. It may even be possible to enter completely unrelated industries where the same business model can be applied. [updated 15 October 2010]